Committee for Russian Economic Freedom

Verdict Destroys Hopes for the Rule of Law, Independent Courts, Protection of Property Rights and Government Anti-Corruption Drive in Russia

Defense Slams “Charade of Justice”

Reuters

New York, December 27, 2010 – Today a Moscow court found Mikhail Khodorkovsky and Platon Lebedev guilty of embezzling a staggering two thirds of the total production of the Yukos Oil Company over a six-year period. The conviction in this 22-month mock judicial process confirms the subservience of the judicial system in Russia to corrupt officials who continue to view Khodorkovsky as a threat and who seek to prevent his scheduled release in 2011. Khodorkovsky is already serving an 8-year sentence, handed down in 2005, but dating from his arrest in 2003. Had he been found not guilty he would have been released in 2011, a few months before Russia’s 2012 presidential elections. The new unlawful prison term will be announced either this week or shortly after the Khamovnichesky Court reconvenes from holidays in mid-January. Prosecutors have asked for 14-year sentences for Khodorkovsky and Lebedev.

According to lead defense lawyer Vadim Klyuvgant: “The trial was a charade of justice, the charges were absolutely false, but I fear the sentencing will be very real.”

The behavior of the prosecutors and of the judge turned the trial into a fiasco. Despite filling time by reading from a 188-volume case file, and parading numerous witnesses into court, prosecutors were unable (and did not even try) to prove how it was possible that Yukos covered its operating costs, invested heavily in capital expenditures and acquisitions and paid taxes and dividends when the entire oil production of Yukos over a six-year period was being stolen, as alleged in the indictment. At the end of the trial, prosecutors further confused their case when they attempted to save face by reducing the volume of oil allegedly stolen by approximately one third.

“This verdict diminishes Russia’s legitimacy in the world stage and signals to policy makers and investors that Russia’s political leaders apply the law as they see fit,” said Pavel Ivlev, former corporate counsel to Khodorkovsky.

The authorities misleadingly attempted to portray the process as legitimate. The defendants were permitted to speak in court almost without restrictions, but the judge blocked their lawyers from introducing exculpatory documentary evidence and refused to hear many witnesses and experts. Illusions of adversarial process and legitimacy were created by allowing the defense to file motions and objections to serious procedural violations, however the judge routinely quashed the vast majority of these motions and failed to react to the objections. The defense and the defendants persisted to the end in doing anything they could to document the full extent of the mistrial, and have publicly released online all submissions rejected by the court.

The verdict in this trial is based on patently false allegations that are incompatible with the first case against Khodorkovsky and Lebedev and with the enormous tax claims that bankrupted Yukos to the benefit of persons controlling state-run Rosneft. The conviction is also impossible to reconcile with numerous decisions of Russian courts that have recognized the tax claims against Yukos. Today’s ruling also contradicts Russia’s official position as it attempts to defend its treatment of Khodorkovsky, Lebedev and Yukos before the European Court of Human Rights. There, the Russian authorities allege that it was lawful to impose grossly punitive taxes on proceeds from the sale of oil owned, sold and accounted for by Yukos. On the other hand, in the Khamovnichesky Court the prosecutors allege on behalf of the Russian Federation that the same oil was stolen from the company by Khodorkovsky and Lebedev, and therefore could not have been sold by Yukos. The court supported the slanderous allegations of oil theft despite the fact that the so-called “injured parties”, production subsidiaries of Yukos, received not only full compensation for their production costs but also 2 billion USD profits from sales.

Politically it is notable that in the most high-profile trial in Russia, closely-watched by the public and media all over the world, the court could so openly ignore applicable procedural and substantive laws as well as basic notions of fairness. This is testament to the power of those corrupt officials who zealously seek to justify their seizure, control and ownership of Yukos assets and to isolate Khodorkovsky and Lebedev from Russia’s business and public spheres – and to keep them in jail as long as possible to achieve these goals. Prime Minister Vladimir Putin’s most recent (but far from the first) public intervention in the case and undisguised pressure on the court came in televised remarks on December 16, 2010, one day after a last-minute postponement of the reading of the verdict to December 27, 2010. With the judge still deliberating on the case, the Prime Minister directly mentioned the current charges and stated that Khodorkovsky’s guilt had been proven in court and that he must stay in jail.

The trial and its verdict are an open challenge – and indeed an affront – to President Dmitry Medvedev’s highly-publicized efforts to ensure the rule of law and to reform Russia’s criminal justice system and to fight government corruption. If upheld on appeal, this verdict shall be a triumph of corrupt officials controlling Russia’s law enforcement and judicial bodies, and a setback for an entire country that aspires yet continually fails to modernize.

Russian President’s chief economic advisor Arkady Dvorkovich acknowledged in a BBC interview that his country is having a perception issue. He also suggested that 1,000 years of corruption is a hard habit to kick but the authorities are looking into violations of the rule of law. Acceptance is the first step to change and Russia is in need of much change. In the latest Transparency International  survey, Russia declined in ranking again this year to 154 out of 178 countries.

Perception is based on reality and a whistleblower came out today to implicate Prime Minister Putin at the top of an elaborate multiyear scheme to extract contributions from Russian businessmen. Sergei Kolesnikov, a business associate of Putin, has offered the most detailed description of how Putin has engaged in a combination of corruption, bribery and theft to amass his own personal wealth. Read the letter here.

In the open letter to President Medvedev, Kolesnikov reveals Putin’s secret funding network. This letter was delivered Tuesday to the Russian U.N. mission in New York. Two or three times a year Kolesnikov regularly briefed Putin on his personal wealth accumulated through contributions by businessmen. Washington Post columnist David Ignatius wrote today that “it’s one of the most detailed allegations I’ve seen of the links between Putin and Russia’s “crony capitalism.”

Additional reporting by Ellen Barry at the New York Times show how corruption and politics prevent uncovering the truth about the death of Sergei Magnitsky. Contradictory official statements and lack of oversight have prevented the truth to be known. President Medvedev established the Public Oversight Commission to look into the case but after an initial thoughtful review was hijacked by security forces.

These same Federal Security Service (FSB) forces also known as the siloviki are the subject of an article in the New York Review of Books which refers to them as the New Nobility in Russia. In the assessment the FSB runs the country with Putin at the top.

…the FSB focuses its efforts on protecting the Kremlin’s vast economic interests, suppressing legitimate political opposition, and ensuring the Kremlin’s control over the press and television through intimidation and violence.

Alrosa, world’s second largest diamond producer, is considering a stock market flotation in 2012. Currently majority-owned by the Russian government, Alrosa is closed to outside equity investors. Despite some optimism that greater foreign investment would translate to better corporate governance, Alrosa is preparing for their float by restricting the ownership structure. This is standard operating procedure at Kremlin Inc. As we have noted before, the Russian government keeps tabs on its investments even as it looks for fresh sources of capital outside its border by restricting percentage of shares a Russian company can list abroad.

With state capitalism firmly entrenched in Russia, Alrosa maintained its production volume even as other diamond producers have scaled back. Alrosa sells its excess diamonds to the Russian government, which owns a $1 billion diamond stockpile. This indicates that Kremlin officials might have other uses for Alrosa besides the float on a foreign exchange, as another channel for top-level corruption.

The verdict for the Khodorkovsky trial has been postponed until next Monday, December 27th and it looks like the market has already priced in his continued conviction. Russian stocks remain at a 30% discount to other emerging market stocks based on forward price/earnings multiples. That the government or oligarchs own 44% of Russian equities may indicate a not just a strong government influence in business but also a lack of enthusiasm among foreign investors for Russian companies. And since 2005 the 24 stock offerings of Russian companies have returned 13%, but remove gas producer Novatek and the return falls to less than 1%. No wonder investors are in no hurry to allocate capital to Russia.

Today the postponement of the verdict for Mikhail Khodorkovsky was announced by Judge Danilkin without much fanfare. Already a strong litmus test for President Medvedev’s commitment to end legal nihilism, the Khodorkovsky trial has become a bellwether for the future of Russia. Moving the verdict to December 27th, the traditionally quiet period between Christmas and the New Year seemed to some like the Russian government wanted to reduce the world’s focus on Russia’s most famous prisoner.

US Senator John McCain recently said at a speech at John Hopkins University,

And then there is the sad ongoing saga of Mikhail Khodorkovsky, whose company was stolen from him, and who has languished in jail for seven years.  When his sentence expired recently, new charges were manufactured against him. He is not being tried by a jury, just a single judge, and the political fix has been in for a long time. He could now face up to 12 more years in prison. If ever there were a case of ‘legal nihilism’ – of an affront to the very values of equal justice that we hold dear – the case of Khodorkovsky is it.

David Remnick, editor-in-chief of the New Yorker, wrote the lead Talk of the Town article this week when he addressed the issue of the Khodorkovsky trial and what it means for Russia’s future

Khodorkovsky exploited the lawlessness of the era no less than his fellow-oligarchs did, but he was more reserved than the rest…Over time, he also displayed unusual signs of independence from his Kremlin patrons. And, for Putin, there was the rub. Khodorkovsky began to see the necessity of playing a less sleazy game—not least in order to attract foreign investors…
The Khodorkovsky affair long ago erased any notion in Russia of an independent judiciary; it made plain that the courts do the bidding of a corrupt hierarchy that will stop at little to enrich itself.
Russia undermines its pretense to modern statehood with such an appalling abuse of state power. Putin’s ruthlessness is apparent. President Dmitry Medvedev ostensibly has the power to pardon, and he has shown some small measure of independence from his patron, speaking of the “legal nihilism” that prevails in Russia today. Does he have the capacity, much less the courage, to release Mikhail Khodorkovsky?

In his article, “What now for Russia? Part Three” Anthony Harrington argues that not only does the Khodorkovsky trial blatantly flaunt the rule of law, the actions of Khodorkovsky and his business associates indicate that he was getting Yukos in financial shipshape for a possible sale to foreign investors and listing on the New York Stock Exchange.
Which leads us to the question of what does the postponement mean? While reading into the nondecision is a little like reading tea leaves, it is probably safe to say it indicates a neutral or negative final outcome. With the delay, the authorities may try to mitigate negative public reaction to a guilty verdict. Alternatively, it could be that the judge, who obviously had made his own opinion so far, was unable to get approval from his supervisor. Or it could be something else more germane, such as needing more time to write the decision. Ultimately, the postponement demonstrates to the world that Russia’s judicial system is far from independent.

On Russia’s Constitution Day, December 12^th, demonstrations in support of Mikhail Khodorkovsky and against the Russian government will take place in Moscow, St Petersburg, New York, Chicago and London.

The protests are against Russia’s failed judicial system, and the government system that is corrupted to the core. In New York, the demonstration will be held at noon ET by the Permanent Russian Mission to the UN at 136 East 67 Street.

For more information, click here.